Will Apple's Low Revenues Slow Down The App Store Phenomenon?

from the loss-leader-redux dept

Wed, May 20th 2009 8:55am — Carlo Longino

Apple triumphantly announced a little while back that iPhone and iPod Touch users had downloaded more than a billion applications from its App Store in under nine months. But a research firm said last week that it estimated Apple had only earned a maximum of $45 million for itself from all those downloads. The figure was extrapolated from research into the pricing of apps, and isn't based on anything Apple has disclosed about App Store revenues, but it does illustrate how Apple's using the App Store: just like the iTunes Music Store, as a means to drive hardware sales rather than generate significant direct revenues. The App Store adds value to iPhones and iPod Touch devices, making the hardware more desirable, just like iTunes does for other iPod devices. That's the real value for Apple, and is measured in strong device sales, rather than direct revenues.

Will these figures and their implication put the brakes on the app store craze that's tearing through the mobile industry? If Apple's already garnered more than a billion applications, and only has a max of $45 million to show for it, it would seem to call into question the widely held belief among mobile operators and other device vendors that app stores offer a valuable new direct revenue stream. Perhaps Apple's experience demonstrates that the real value of app stores is in extending the capabilities of hardware with new software and services, and using this to make the hardware more attractive, and in turn driving sales. But will the other players see app stores in the same way, or try to exploit them as revenue streams? Apple's shown with the iTunes Music Store that it is willing to use loss leaders as a tool to sell hardware. Will operators and other vendors be prepared to do the same?

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Filed Under: app store, iphone, loss leader
Companies: apple

22 Comments

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Steven, 20 May 2009 @ 9:31am

Must be nice...
when your 'loss leader' generates revenue. Of course I'm assuming here that it's enough to cover the costs.

I don't understand the point of looking at a very narrow part of a company and analyzing it as if it's a standalone enterprise. The 'does it make money' question isn't necessarily a bad thing, but it's irrelevant without a bigger picture view of how it fits in with the overall business.
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Freedom, 20 May 2009 @ 9:36am

Government Thinking...
>> only has a max of $45 million to show for it

Wow, you know this is a lot like my Grandpa used to say, a million here and a million there and before you know it it really adds up to something :)

Any business that generates $45 million is pretty darn cool to me. I guess in the world of 1.9 trillion dollar deficits, $45 million just ain't what it used to be!!!!

If Apple isn't making money with the $45 million in revenue, I'm sure they could easily cut out the app approval department jobs and make a lot of people extremely happy and help their bottom line.

Of course, as you stated the real reason to have an app store is to have a central place/store people can find applications for their devices and drive hardware sales. This move was brilliant and something Microsoft should have done long ago with its Windows Mobile Phones. Ironically, even if the online stores don't make money, they are now a necessary expense as Apple has raised the bar. As much as I hate Apple and their control freak ways, they've done a great job of stirring the pot and making everyone compete to a higher level and ultimately that means that we consumers win. Wow, I think that is the first nice thing I've said about Apple ever (back handed compliment no doubt, but still... this a milestone day for me....).

Freedom
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Anonymous Coward, 20 May 2009 @ 9:47am

Re: Must be nice...
Duh. That was his whole point. The business is doing quite well, largely because Apple is willing to be light-handed at the App Store.
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Derek Kerton (profile), 20 May 2009 @ 9:56am

Should Be Good For All
Who else is proposing app stores:

- OS vendors
- device makers
- Carriers
- Qualcomms
- Independent app stores

So, since Apple has set the price points, and those will be (more or less) mimicked, will these other players be able to benefit from an App Store as a loss leader?

OS: Yes. They will sell more devices using their OS. Their OS-powered devices will be more powerful, and more attractive to the market.

Device Vendors: Just like Apple, so RIM and others can benefit similarly.

Carriers: It's less obvious, but those smartphones, and the apps that ride on them increased the demand for data subscriptions. This absolutely helps the carries because expensive data subscriptions are a big recurring revenue.

Qualcomm: They've talked about an app store for phones powered by their chips. I think it's less obvious how they will do this as a loss-leader. They historically have extracted a fair bit of rent for the use of their BREW application platform. They are offering to white label an app store for carrier partners, which may work for smaller wireless carriers (
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Derek Kerton, 20 May 2009 @ 9:58am

Re: Should Be Good For All
I got cut off. Here's the rest:

Qualcomm: They've talked about an app store for phones powered by their chips. I think it's less obvious how they will do this as a loss-leader. They historically have extracted a fair bit of rent for the use of their BREW application platform. They are offering to white label an app store for carrier partners, which may work for smaller wireless carriers (
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Anonymous Coward, 20 May 2009 @ 10:00am

Re: Should Be Good For All
Oh, now I get it, I put in a "less than" code tag which ended my post. Here's the rest:

Qualcomm: They've talked about an app store for phones powered by their chips. I think it's less obvious how they will do this as a loss-leader. They historically have extracted a fair bit of rent for the use of their BREW application platform. They are offering to white label an app store for carrier partners, which may work for smaller wireless carriers (less than 5M subs) that don't have the resources to build their own.

Independents: Times are tough for the likes of GetJar or Handango. These device and carrier tied app stores are siphoning off a lot of demand, just as demand is finally growing for add-on apps. However, the rising tide is floating all boats, and there seems to be room for a handful of independents. These companies cannot do a store as a loss-leader, so they will have to keep costs down if they expect to survive.
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Ryan, 20 May 2009 @ 10:13am

Re: Government Thinking...
The opposite of government thinking, really. The government considers a $45 billion loss to be inconsequential; a corporation is upset with a mere $45 million profit absent additional hidden factors, which illustrates the astounding lack of efficiency in government...

While $45 million is a lot to you or me, it is merely nice for Apple in the same way that $5 is huge for a starving child in Somalia or somewhere and merely nice for us. Apple posted $32.5 billion in revenue last year; $45 million is about one tenth of a percent of that. And considering that they claim over a billion downloads, it means that the marginal revenue on additional downloads is extremely low. It's nice, but a mere $45 million doesn't mean a whole lot split among its many stockholders and 35,000 employees.

But as everybody has mentioned, its real value is as an incentive to buy other Apple products with greater profit potential.
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Anonymous Coward, 20 May 2009 @ 10:14am

Look at is it this way:
Software repos are a HUGE benefit beloved among linux users.
That's not to say there's a huge revenue stream in charging for them.
I imagine it's much the same on all platforms considering that these days consumers are often using FOSS for lots of things even on mac and windows.
Appstores are definitely a value added for the platform more than a profit maker.
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Brooks, 20 May 2009 @ 10:39am

Or...
"A research firm's" numbers could be wrong. This is Excel modeling from a financial guy, and at least the Information Week writeup has the following glaring problems:

- It's based on a $2.65 "mean" price for paid apps. Think about it: if a $0.99 cent app sells 1000 copies and a $9.99 app sells 10 copies, the mean app price is $5.49. Of course, the average *sale* price is about $1.08. Oops.

- Because Apple is contractually slow pay for apps, they sit on the entire purchase price for about 45 days on average. It's not a lot, but the interest income there is going to be a couple of million dollars even at the $45m number. If a more realistic number of $100m profit is assumed, that $350m in sales, and $350m @ 3% APR for 9 months ~= $4m.

- The study doesn't factor in revenue from App Store dev memberships. Figure there are about 25k @ $99 = $2.5m. There are probably more than that

On the whole, this isn't a bad "worst case, very simplified" study. But to treat the results as factual is just silly.
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Chronno S. Trigger, 20 May 2009 @ 10:52am

$45 million
Yep, that'll run the servers for another year.

(Only $45mill? I wish I had their problem.)
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TheStupidOne, 20 May 2009 @ 11:59am

Very Very VERY Basic Economics
If revenue > operational costs then you have profit. If you have profit => 0 then it makes good business sense to maintain the operation.

That aside, assume the app store costs Apple $1,000,000 per month for servers, bandwidth, maintenance, and app screeners. I personally think that is generous, but even at that there is plenty of revenue to covers their costs for as long as the app store has been operational. Sure 45 million dollars isn't that much to apple, but it still looks like a net positive to the company.
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Coolridge, 20 May 2009 @ 12:00pm

Over-simplified
This article and its questions assume that the direct revenue stream cost some sort of money on the part of Apple and that its a cost that needs to be reimbursed through gangbuster sales. Other companies that are looking to App Stores to make money for them would be overlooking that the very business model the App Store that Apple developed is based in is only to make incidental software sales for the company while providing the customer with a very attractive reason to buy its hardware.

This isn't rocket science business models at work here. Apple provides the forum for the distribution of the downloads. They don't provide the bandwidth or carry a large overhead for validating the software that is carried in the store. They take a small percentage to cover their overhead and the user and the app-makers who hit it big get the lion's share of the benefit. Meanwhile Apple sells more hardware because their hardware is more useful than other people's hardware because of this store.

Having a direct revenue stream from the store to create mainline profits for the company was never the intent and this article misses that point or at least fails to ask that as the real question.

To answer the question directly then the answer is simply "no of course it will not slow down app developments on the app store as it makes no difference to them."
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Marc M, 20 May 2009 @ 1:08pm

Apple Is SMART!!!!
I always thought that Apples were overpriced hardware focused on aesthetics.

However, I am now an Apple convert and will be purchasing a Macbook Pro in about a week.

Why? The answer is that they have developed GREAT software that I WANT TO USE and I can ONLY use it on an Apple. After years of never being totally satisfied with any of the available DAWs available to p.c. users, Apple goes and introduces Logic Studio!

It's the most intuitive, user friendly, yet POWERFUL DAW I've ever played with! I HAVE TO have it, as every other DAW seems like outdated, ugly, clunky freeware in comparison! In Logic Studio, they give you a soup to nuts app package for 500.00 that in the p.c. world would cost you THOUSANDS to assemble in separate apps., plugins, and add ons that may or may not work well together!

I feel the same way about the new Final Cut Studio. I never really cared what my machine looked like, but when there is really well designed software out there that I can ONLY use on a Mac, you BET I'll pony up the cost on the hardware end.

Without such GREAT software at such great prices, I'd certainly find it extortionate and absurd to pay 2 grand for a laptop.

I'm proof that Apples strategy of selling pricey hardware with the carrot of AWESOME apps at unbelievable prices is genious!...
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Jason, 20 May 2009 @ 1:14pm

Re: Very Very VERY Basic Economics
Actually, it only makes good business sense to maintain the operation if you have "economic profit," i.e. you're earning a higher rate of return than what is normal to the market for similar investments at a comparable level of risk.

However, as Mike has pointed out, sometimes the value of two investments are interdependent. In this case a combined valuation is in order.
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Derek Kerton, 20 May 2009 @ 2:30pm

Re: Over-simplified
Did you read the part of the article where Carlo said:

"Perhaps Apple's experience demonstrates that the real value of app stores is in extending the capabilities of hardware with new software and services, and using this to make the hardware more attractive, and in turn driving sales."

Now that I've cut it out for you, and you've read it, do you still think:

"Having a direct revenue stream from the store to create mainline profits for the company was never the intent and this article misses that point..."
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Brooks, 20 May 2009 @ 2:40pm

Re: Very Very VERY Basic Economics
Um, no, that's very basic *accounting* you're talking about.

In economics, if revenue > opportunity cost, then you have a profit. If Apple, hypothetically, invested $1B to make a $45m profit, it would be an economic loss (but an accounting profit) because they could have just put the money in the bank and made about as much money with less risk.

I personally think they made a lot more than $45m, but it's important to be clear on the difference between accounting and economics.
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Derek Kerton, 20 May 2009 @ 2:41pm

Re: Over-simplified
Oh, and the other thing you misread: the question isn't whether the Apple App Store will persist, it is whether competing stores will be able to succeed using the app store as a loss leader.

"But will the other players see app stores in the same way, or try to exploit them as revenue streams?" Will the low revenues from Apples App Store "slow down the App Store phenomenon" that is sweeping across the industry, well beyond Apple.

The question is asked regarding players like Blackberry, MSFT, wireless carriers, and such.

You have misread 2 out of 2 salient points of Carlo's post:
1) Apple's store works well as a driver of device sales
2) Will this work for other app store players?
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Kontra, 20 May 2009 @ 3:16pm

Apple The Storekeeper
"Imagine 50 million users with credit card purchase history: apps they buy; how long and how often they use them; what they purchase within the apps; what personal connections they make; what email/text and app notifications they get, and how often and where; what traffic patterns emerge at what times; what applications are crying to be developed; what’s a good time to introduce products and services; what price levels are sustainable; what happens when prices are increased or lowered; and myriad other analytical insights that any CEO with half a brain would happily sign a “$20-45m” check for with his own blood. And that includes Google CEO Eric Schmidt and, when he wakes up from his consumer-markets induced coma, Microsoft CEO Steve Ballmer."

From:

Apple The Storekeeper
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Ferin (profile), 20 May 2009 @ 10:38pm

I don't think so.
The way I look at it, Apple isn't in the business of selling apps or music. They're in the business of selling ipods. You get an ipod, and all this stuff that makes your life better comes on it. It breaks maybe a couple years later, what are you gonna do? Toss all the effort and money that went into your ipod down the drain, or buy a new one and start over right where you left off?

They don't really care about app revenue, or music revenue. The real money is in selling the devices they come on.
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TheStupidOne, 21 May 2009 @ 9:01am

Re: Re: Very Very VERY Basic Economics
The key word in there was 'maintain' It doesn't matter how much money you spent getting the app store in business because once you are making an accounting profit on it then you should maintain it.

Now if they spent $1B and are making just $10M in profit a year then it'll take 100 years to see a return on investment but there will be a return. If you shut the operation down you are just out the $1B
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nasch, 21 May 2009 @ 2:19pm

Re: Re: Re: Very Very VERY Basic Economics
You may still be missing the distinction. Absent any other considerations such as driving iPhone sales, if Apple is spending $35M/yr on the app store and making $45M, that isn't enough to tell whether they should keep doing it. There could be some even more beneficial way to spend the $35M.
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Dima (profile), 16 Feb 2010 @ 7:20am

Wholesale Applications Community
I think propietary application stores and networks are going the way dinosaurs went... This good article at engadget reports on 24 big Telecom operators worldwide that unite ot create "Wholesale Applications Community... the goal of the alliance will be to create a viable, cohesive and open industry platform for mobile app developers.": http://www.engadget.com/2010/02/15/twenty-four-telecom-operators-unite-to-form-wholesale-applicatio/ Link to the site itself: http://www.wholesaleappcommunity.com/ Good to note that Nokia, Apple and Google are not amongst them. And with HTML5 coming soon to break more barriers for apps...
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